The Weir Group PLC

Jonathan Stanton - Chief Executive Officer John Heasley - Chief Financial Officer Charles Berry - Chairman

Stephen Swanton - Redburn Mark Davies Jones - Stifel Glen Liddy - JPMorgan Robert Davies - Morgan Stanley Jonathan Hanks - Goldman Sachs Jonathan Hurn - Deutsche Bank Alex Virgo - Merrill Lynch

Well, good morning ladies and gentlemen and welcome to Weir’s 2017 Interim Results Presentation. As usual, we are recording the session and so we would appreciate if you could turn any mobile phones to silent.

I am joined by our CFO, John Heasley and we’ll be delighted to take any questions after our initial presentation. Our Chairman, Charles Berry, is also with us in the audience today.

From a safety perspective, there are no fire alarm test plan today, so if it goes off it’s real. Please make your way to the exits following the green running man signs.

Before I turn to the group’s performance in the first 6 months of the year, I’d like to remind you of We are Weir, our strategy and long-term vision. In essence, we want to be the most admired engineering business in our markets.

This means delivering growth ahead of those markets and stronger returns for investors, providing a safe and inspiring place to work for our people, developing enduring strategic partnerships with our customers and suppliers and always doing business the right way guided by clear values. If we do that, we will build a truly sustainable business, continuing our rich heritage, but with an even more prosperous future.

We only launched We are Weir in February, but it’s been embraced by our people all over the world and we are making some good initial progress. I said back then that the keys to our future success were our four distinctive competencies, where we can make a real difference and set ourselves apart from the competition, they are people, customers, technology and performance.

In the first half, we kept more of our people safe with an excellent reduction in total incident rate of 28% to less than 0.5%, which is approaching world class performance, but we won’t be satisfied until we are a zero harm business. We also refreshed our leadership in development programs, which were cutback during the downturn.

Indeed, one of the themes of the first half has been rebuilding across our businesses. That includes investing in more people, to listen, learn from and help our customers meet their objectives.

Customers appreciate our record of delivering high-quality and reliable solutions with dependable support and that’s reflected in the great relationships we have, but we can’t stand still and need to become ever closer to them as strategic partners. We also continue to benefit from prioritizing R&D spending during the downturn, with more than £60 million in revenues from new products in the first half.

Our technology blueprint for 2021 is currently being developed, a process led by our new Chief Technology Officer, Geetha Dabir, who joined the group earlier this year after a long career in Silicon Valley. Finally, I spoke in February about the opportunity to improve operational performance and specifically inventory turns and on-time delivery.

We started that process with action plans and capability training for every business and we will report on progress in our full year results. So we have made a good start, putting together the building blocks to deliver our vision.

Let’s now turn to the group’s performance in the first 6 months. And the most striking feature of the first half has been the momentum we have seen in our main markets and the way the group has been able to take full advantage of these favorable conditions as you can see in the excellent 20% increase in order input.

Having been through an intense downturn, we are now firmly in growth mode and investing to ensure we make the most of the turnaround in our mining and oil and gas markets. The biggest positive of course has been the rapid recovery in North American upstream markets, particularly towards the end of the period.

As you can see, second quarter import in North American oil and gas grew by more than 100% as more frac fleets were put back to work using Weir power ends, fluid ends, pumps and iron. Shale continued to show its resilience at current oil prices, demonstrating the industry’s maturing position as a long-term source of global energy supply.

The first half also saw the group’s mining markets improve as customers continue to increase production by optimizing their existing assets. That leads to Brownfield opportunities and the success of our focus on these can be seen in the strong increase in the order book.

That was helped by our investment in the Minerals division. We have added more people and reconfigured some manufacturing capacity to accommodate the growth we have experienced so far this year and the additional demand we expect in the future.

Flow control markets continued to be tough, but the division is very focused on returning to growth as conditions improve. So, the group is in a strong position, our main markets are growing and we are investing to ensure we consistently outperform.

I will say more about how we do that in a few minute, but first I would like to ask John to take you through the first half numbers in detail. John?

Thank you, Jon and good morning everyone. I will start with a summary of the results with performance shown on both a reported and constant currency basis before exceptional items.

Order input is up 20% on a constant currency basis due to the significant market recovery in North American oil and gas and strong growth in minerals. Momentum continued to build with both divisions having now seen three straight quarters of sequential growth.

Revenue was up 10%, with the delta from input reflecting order phasing and resulting in a £98 million build in order book during the first half, approximately two-thirds of which is short cycle aftermarket. Operating profit at £113 million was down £10 million or 8% on a constant currency basis, including net one-off charges of £9 million mostly relating to legacy contract challenges at Gabbioneta.

Excluding these one-offs, operating profit was broadly in line with last year, with significant growth in oil and gas being offset by shortfalls in Minerals and Flow Control. The Minerals shortfall reflects more typical first half, second half phasing and investment in strategic growth and operational readiness, with payback starting in H2.

While Flow Control continues to see margins and recoveries impacted by depressed and highly competitive market conditions. This led to operating margins at 10.3%, down 210 basis points in the prior year on a constant currency basis.

Profit before tax, excluding exceptional items and intangibles amortization at £92 million is £10 million or 12% higher than the prior year after a translational FX benefit of £19 million. Headlined earnings per share of £0.32 compared to £0.296 in 2016 and the interim dividend remains unchanged from last year at £0.15 per share.

Cash from operations at £78 million was £55 million lower than last year and reflected growth in working capital in both oil and gas and minerals to support delivery of the strong order book during the second half. I will now give a summary of the first half performance for each of the divisions on a constant currency basis, starting with Minerals.

Market conditions remained favorable with copper and gold prices continuing to be supportive of production and customers stepping up their pursuit of increased efficiency and capacity upgrades. Against this market backdrop and from a strong base, Minerals had another excellent performance, with a 14% increase in OE orders and 10% in aftermarket.

You will remember that in February, I said that quarter four 2016 was the largest input quarter in 2 years. Since then, the momentum in Minerals orders has continued to build, with each of the first two quarters this year again growing sequentially.

Globally, we saw good growth across all regions, with the most significant increases in Canada of the back of higher oil sands activity as new plants come online and in Australia, where gold and lithium are particularly supportive. Revenue was flat year-on-year, with original equipment down 9% and aftermarket up 4%.

Revenue lagged input due to the phasing of orders, but also as expected and previously highlighted, we saw lull in GEHO revenues given weaker project input over the last 18 months. This in itself was a £25 million reduction in revenues year-on-year, much of which will reverse in the second half.

Given the input phasing, Minerals order book increased by £69 million in the period, with a significant proportion for delivery in quarter three. Operating profit reduced by £15 million to £105 million, with operating margins falling to the lower end of the Minerals historic range of 17% to 20%.

With gross margins remaining solid, this movement reflects the transition from downturn to growth through the first half in three main areas. Firstly, as discussed in February, we are making an incremental £15 million investment in our strategic priorities during 2017, £5 million of which was incurred in Minerals in the first half.

Secondly, again as noted in February, the lull in GEHO revenues of £25 million and associated under recoveries had a £5 million profit impact. And thirdly, a number of factory moves in the period contributed to a £5 million impact on recoveries and temporary supply chain inefficiencies.

Standing back, we have added almost 500 additional people to the division since the low point at the end of June last year, with around a third of those market facing and driving great input success, with the balance supporting increased tender and project management activity and building operational capability to deliver on increased revenues in the second half. In short, after a multiyear downturn, we have done what we had to do to position the business to sustain growth and high margins through this next market cycle starting in H2 when margins will return to the upper end of our historic range.

Operating cash flow at £83 million was £22 million lower than last year primarily due to a buildup of inventory to support near-term delivery of the increased order book. Turning to oil and gas, where North American market conditions have been extremely positive, average U.S.

land rig count increased by 70%, well completion activity increased accordingly and stacked pressure pumping capacity continued to be refurbished. In addition, while early days, we did see some initial examples of new pressure pumping horsepower being added in the period.

All of this together resulted in strong demand for our pressure pumping and pressure control products and services. International markets continued to be subdued and we saw few signs of an early recovery.

This all left the divisional input 76% ahead of the prior year, with Q2 up more than 100% in the prior year, which did reflect a low point. North American input was up more than 100% across the 6-month period, indicating the strength of our customer relationships and operational capability.

While oil prices were relatively volatile in the period, the average for WTI through the first 6 months was $50 and we saw no letup in demand through the various troughs, with both pressure pumping and pressure control seeing strong sequential growth from Q1 to Q2. Like Minerals, oil and gas revenues lagged orders due to the strong order progressing through quarter two.

Even so, revenues increased by £109 million or 53% to £314 million. All of that absolute increase was driven by a 69% increase in North America, with international flat.

This resulted in a book-to-bill in the period of 1.13 and a £38 million increase in the order book. Operating profits at £32 million represented a 34 million increase in the prior year, a flow through of 31%, with North American flow through closer to 35%.

This was ahead of expectation mainly due to improved recoveries on the back of higher activity levels, with our main Fort Worth facility close to three shifts at the end of quarter two. In addition, albeit less significantly, we saw initial modest pricing gains through the second quarter.

Pressure control reached broadly breakeven at the end of Q2, while international margins were maintained at high single-digit. Operating cash flow at minus £1 million reflected investment in inventory to support increasing volumes as well as higher datas due to increased revenues.

Moving on to Flow Control, which you will recall has historically been exposed around 40% to power and 30% to downstream oil and gas, with the balance principally general industrial. Project decisions continued to be delayed in those projects that do progress are subject to significant competition.

This is especially acute in the downstream oil and gas space. Maintenance spend is generally progressing in line with scheduled plant outages.

Against this backdrop, input was 13% lower year-on-year, with original equipment being down 26% and aftermarket up 2%. This movement was dominated by our exposure to downstream oil and gas, which was down 40%, mainly due to our Gabbioneta business, with input across all other markets broadly in line with last year.

Revenue was down 6% compared to 13% for input, with a number of large valve and pump orders shipping in the period. The operating loss of £12 million includes £13 million of one-off charges relating to legacy contract charges at Gabbioneta, mainly project cost overruns and associated damages in costs on a number of contracts booked over the last 4 years.

Having dealt with these issues, the new management team are now turning their attention to maximizing competitiveness and integrating the Gabbioneta EPC sales channel with the broader Flow Control business. Excluding the one-off charges, the division was just above breakeven, reflecting unfavorable phasing and under recoveries as volumes declined.

This was more significant than the 6% revenue shortfall would suggest as the revenue in the period included the shipping of a number of longer term contracts where much of the recovery benefit had been seen in prior periods. The division remained cash generative with operating cash flows of £8 million, reflecting further reductions in working capital as a number of long-term jobs were shipped.

I would now like to turn to our cash performance. As you would expect during a period of growth, we have invested in working capital across both minerals and oil and gas.

Increased datas reflect the growth profile during the first half, with revenues increasing through Q2, while inventory growth has been necessary to ensure we are able to promptly execute on the strong order book as we move into Q3. The resulting operating cash flow at £78 million was £55 million lower than last year.

Free cash flow before exceptional items and acquisitions was an outflow of £50 million £96 million lower than prior year with increased tax and dividend payments adding to the year-on-year operating cash reduction. Tax paid increased by £17 million compared to last year, which included a significant U.S.

tax refund as losses were carried back. While the increase in dividends paid from £32 million to £57 million reflects a lower uptake for the scrip dividend.

Exceptional cash flows of £17 million mainly reflected utilization of provisions for restructuring activities created in prior years. After a favorable foreign exchange translation impact on net debt of £35 million, net debt increased by £34 million to £869 million.

On a covenant basis, this resulted in a net debt to EBITDA of 3.1 times, which when adjusted for the Gabbioneta one-offs was just below 3 times and in line with expectations. Similarly, we continue to expect a significant de-leveraging through the second half as EBITDA increases.

Finally, let me leave you with some guidance on financial matters for the balance of the year. I expect to see a working capital inflow in the second half of the year, but stronger activity levels in oil and gas will result in a small outflow on a full year basis.

Consistent with my comments in February, I expect CapEx to be around £80 million to 90 million or approximately 1.5x depreciation. The tax rate also stays in line with prior guidance of between 23% and 24%.

With the slight strengthening of sterling since February, I do not expect any further significant translational effects benefit through the balance of the year such that the full year impact will remain at around £20 million compared to the £25 million that I had indicated in February. Finally, execution of the order book and associated increase in EBITDA means I expect net debt to EBITDA to move quickly towards 2 times through the balance of the year.

Thank you. And I’ll now hand back to Jon.

Thanks, John. So, as you just heard, the group has built strong momentum.

I will talk in a few moments about what our customers are saying and the market fundamentals that support that, but it’s also worth reflecting on the benefits we gain from our business model. Our customers depend on our mission-critical solutions.

As I said earlier, we aim to be strategic partners, not just suppliers. Our technology carries a premium because of our applications and materials knowledge and we are aftermarket oriented, working in sectors where production methods are intense and demand for spares and services is strong.

And finally, our unrivaled service center network both in mining and oil and gas provides a real competitive advantage. That means we can respond quickly to the need in our industries we serve.

It’s a business model that maximizes value through the economic cycle. And for our biggest markets, the fundamentals look strong for the next few years.

Let me start with mining, where we have seen a normalization of production activities as improving commodity prices boosted customer sentiment. We believe production growth will continue to be driven by macro themes, including emerging market growth and infrastructure investment, while new themes such as electric vehicles and battery storage will provide further support.

For example, it takes around 160 kilos of cooper to produce a battery car and charging point. These trends are in addition to ongoing ore grade declines that mean increasing amounts of rock needs to be processed, which remains a positive for us.

So in the round, the production outlook for cooper, gold and other base metals is encouraging for Weir. Bulk commodities such as iron ore and coal may have a less attractive outlook, but are now dominated by low cost producers in countries like Australia and Brazil, where Weir has a significant installed base that will continue to provide opportunity.

From a CapEx perspective, miners want to increase production, but at the moment, they are focused on delivering that from existing mines. That’s why sustaining CapEx and maintenance and plant optimization is growing, which creates significant Brownfield opportunities for technology such as ours that can reduce bottlenecks and increase throughput.

And while Greenfield activity is currently rare, we have seen some early signs of growing interest. Quotations for our longest lead time product, GEHO, are normally an early indicator of future developments and that business is building a strong pipeline in projects involving large piston diaphragm pumps and high pressure grinding roll technology.

If we look at where future Greenfield investments might go, copper and gold have some of the best medium-term prospects and these are the commodities that the division has most exposure to. Indeed, we have already seen some Greenfield activity for gold in Europe and Australia and copper in China this year.

As you can also see, many analysts are suggesting a copper deficit is likely by the end of the decade and that explains why many of the major mining companies have recently been talking about focusing their exploration budgets on copper assets. We have also seen demand for lithium encouraged Greenfield activity in Australia, with Weir already supplying a number of mines in the country and orders from lithium producers growing strongly year-on-year.

So, how are we responding to these positive trends? The answer is through our solutions mindset and investing now to reap the future rewards offered by the opportunities in our mining markets.

We are reconfiguring some manufacturing capability after a period of curtailed investment during the downturn, which has included relocating facilities and moving plants to the most efficient factories. We have also added more than 150 customer-facing roles to take advantage of the Brownfield opportunities we have developed.

So far this year, the division has completed over 200 plant audits to support this strategy. And if you take a brief look at the case study on this page, it shows a typical example.

Engineers visited our customer, CNC, based in South Africa to review the performance of their pump. While there, they looked across the process and highlighted bottlenecks that could be alleviated in the pump, cyclone and crusher.

A package of new solutions was designed and installed using Weir equipment that grew our installed base and importantly, increased the customer’s throughput by 45%, truly a win-win strategy. And that’s just one example.

In others, where equipment is more mature and designs aren’t readily available, we are using laser scanning technology to produce 3D representations of the plant to showcase process improvements that optimize output in a virtual representation of the new solution. It’s a very proactive approach with our people on the ground providing valuable insights and ultimately helping customers increase throughput and productivity.

To ensure we maintain and extend our technology leadership, we have a constant process of innovation. So far this year, we have introduced our new range of crushers to customers in North and South America with some really good feedback.

We have also developed a new range of spools for use in oil sands markets and our IoT technology, Synertrex, is currently on multiple field trials with commercialization expected in the second half of the year. We know our technology is applicable to adjacent markets and the first half saw some good order growth in sand and aggregates, which increased by a third, while oil sands and power both increased by a quarter .

The latter benefited from increased OE demand as a result of new environmental regulations in the U.S. around the disposal of coal ash, where our team worked closely with energy companies to develop solutions to meet these new rules.

So, we are investing in our people, capabilities and technology for current and future growth in markets that are increasingly attractive. Let me now turn to oil and gas, where again we see an industry that is supported by positive fundamentals.

Though oil prices and sentiment remain volatile, global demand continues to steadily increase and is expected to pass 100 million barrels per day in the next couple of years. The market is currently rebalancing, as you can see from the graph at the bottom of the slide.

The pace of that process remains uncertain, but we do know that there has been a period of substantial underinvestment in the past 2 years with the biggest cut in spending to exploration and conventional offshore developments. With normal depletion rates, it looks increasingly as if supply could struggle to satisfy demand by the end of this decade as the International Energy Agency has recently forecast.

And as we have seen this year, the most responsive source of global supply is U.S. shale, where upstream spending is expected to increase by more than 50% in 2017.

Shale is now firmly established as a sustainable and competitive source of energy. Just take a look at the growth of U.S.

crude oil exports, which have risen to more than a million barrels a day, while LNG exports are also growing rapidly with the current U.S. administration supportive of developing this market and the infrastructure needed to enable its long-term growth.

Therefore, going forward, we believe the most attractive oil and gas markets in the world are North America and the Middle East, two regions that represent the vast majority of Weir’s oil and gas revenues and occupy the lower end of the cost curve. And while the international markets remain challenging, we see good prospects in the medium-term, particularly for our wellhead solutions in the Middle East and Asia supported by the acquisition of KOP Surface Products, which we expect to complete shortly.

I would now like to spend a few moments taking you through some of the structural developments we see in our biggest oil and gas market. To put it simply, the shale revolution continues.

While the recent downturn was severe, it wasn’t terminal and indeed the industry has emerged even stronger. For Weir, the changes are positive.

Firstly, the process of accessing oil and gas from shale formations has matured considerably. Previously, horizontal well laterals would have stretched 5,000 feet, with around 14 frac stages.

Today, the average is closer to 7,000 feet with twice as many stages. Indeed, the industry has seen records broken recently with a super lateral in the Utica Shale reaching more than 18,000 feet and over 120 frac stages and our customers will continue to push the boundaries through technology.

The considerable step up in production intensity means the average well pad now requires twice as much frac horsepower as 2014, driving increased demand for our technology and services. The downturn also saw a wave of consolidation across the industry, with just 5 firms now representing more than half the frac fleet.

These larger Tier 1 companies are looking to simply their supply chains, reduce total cost of ownership and get access to the best technology and service capability. These trends play to our strengths and we have been able to leverage longstanding relationships in this new landscape.

Our key account management system has grown our market share with Tier 1 companies and we have also seen customers from smaller operators get acquired and then call Weir to help with their combined fleet upgrades. The third big trend is the increase in productivity in the shale industry.

The average well now produces almost 90% more oil than 2014 and it does so for a lower breakeven price. Now, these structural trends don’t mean there won’t be uncertainty in the market.

No one knows quite for sure what shape the recovery will take and precisely when supply and demand will balance. But the combination of growing demand, restricted new development and the responsiveness and resilience of shale as an industry give us great confidence over the medium to long-term.

More immediately, we have the welcome challenge of growing rapidly. Last year we talked about the pain of the downturn inspiring us to ensure we fully benefit from the recovery.

Well, that hasn’t changed and we are seeing the benefit of our cost and operational discipline with excellent operating leverage and flow-through as the U.S. market tightened rapidly ahead of our expectations.

We have also been able to add capacity quickly, helped by maintaining good relationships with former employees so that they were happy to rejoin us as markets improved, while we have also locked in input costs, further supporting margin performance. As John said, we started to see some modest pricing in Q2 supported by high frac fleet utilization.

In fact, we think effective utilization is now over 90% as a result of the wave of refurbishment activity we have seen recently. That also means capacity has tightened among the equipment suppliers, with lead times in some product lines already extending to the end of the third quarter.

Through the second half, we expect refurb activity to abate somewhat and be replaced with more normal aftermarket demand as the fleet goes back to work. And at some point given the age of the fleet, the long awaited replacement cycle will start and when that happens, we’ll be ready.

A lot of our marketing attention is on showcasing the benefits of our new QEM 3000 frac pump. We have seen inquiries increase and the pump is on trial with several Tier 1 customers who are keen to understand both its continuous duty performance and lower total cost of ownership.

Building on the initial success of the QEM, we are trialing our EPIX integrated power system, which is the first unit where pump, transmission and engine are designed to specifically work together driving enhanced performance. In addition, we launched our one single line technology at the OTC.

It reduces the amounts of complex iron on a frac site, hoping to decrease downtime and increase safety and is already seeing strong demand. So we are in growth mode.

The fundamentals are good. We have the market leading position and a pipeline of new technology and we are excited about the opportunities ahead of us.

Turning to Flow Control whose markets are much more challenging. As John said, there is not much work around in our traditional markets and there are few original equipment projects that are available are highly competitive.

One of the reasons for that of course is the attractiveness of aftermarket revenues, which have been resilient for us. Well, positively, there are some early signs that the project environment will improve and the division is investing in its sales capability to take advantage of future growth opportunities.

We are leveraging key accounts across the division’s businesses with a particular focus on EPCs and also are looking to expand into adjacent markets such as petrochemicals. The business has shown we can be very agile when opportunities arise.

A recent project win for the Yamal refinery in Russia is a good example of this. The team delivered a total of 638 highly specialized safety valves for the project, 185 of which were required for super fast track delivery inside 22 weeks, a record in the LNG industry for the quantity and type of valves supplied.

We just need to do more of this and that’s the focus of the new leadership team. Let me now turn to the 2017 outlook, starting with the Minerals division.

Our guidance is unchanged, with markets expected to be stable, ore production due to increase and the division’s full year constant currency revenues to be moderately higher with broadly stable operating margins underpinned by the strong order book. We recently upgraded our expectations for oil and gas to a material increase in constant currency revenues and profits, with low-teen operating margins in the second half.

We anticipate Flow Control markets will continue to be tough, with the order book supporting modest growth in revenue and a return to a more normal mid to high single-digit operating margins in the second half. Bringing this together at a group level, assuming current market conditions continue and as we said in our 17th of July trading upgrade, we now expect strong constant currency revenue and profit growth.

Finally, we will continue with our track record of strong cash generation, which will deliver substantial de-leveraging in the second half. Let me finish with some main messages from our first half performance.

Firstly, momentum is growing in our main markets, supported by good fundamental trends. Secondly, we have positioned the business to benefit as a leader in these attractive markets by making some early calls on investment.

And lastly, by investing in our four distinctive competencies, now we can achieve sustainable long-term growth ahead of our markets and deliver stronger returns for our investors in the future. Thank you.

And now John and I will be delighted to take your questions. The microphones are in your armrest of your seats.

So, I think you just press the button to speak. Please state your name and organization before you do so.

Thank you.

Stephen?

Good morning. It’s Stephen Swanton from Redburn.

I am not quite sure what the definition of broadly stable is for Minerals margins. Supposedly they took a big hit in the first half and you must be expecting a very big rebound in the second half.

But we have always said kind of mix is the key thing on that business and it looks like the mix is going to be kind of not particularly helpful from a margin perspective. I am just wondering what the reconciling factor is, because presumably kind of investment stays high as the growth comes through and we have got adverse mix coming through.

But what’s the kind of the missing piece? It must be kind of very good margins in the order book or something that’s kind of helping that second half number.

Then on oil and gas, if pressure control is breakeven in Q2 – and I guess it’s a growing consensus that the rig count probably flattens from here. Do those kind of margins get stuck out kind of breakeven to very low single-digit kind of margin going forwards given that business a bit more kind of rig count focused compared to pressure pumping?

Yes. So, let me just start – I will start with the second question there and then I will give you a bigger picture view on the margins and then John will talk a little about the details.

So, as far as – even in an environment where we see rig count flattening off and plateauing in the second half, the trajectory is such that pressure control will return to profitability, because of the order book that it’s got and the step up in volumes that, that will imply from – relative to the first half. In terms of Minerals margins, I think the big picture point is you got to recognize that we have – the minerals business has been run very, very tightly over the last few years and we are now in a transition phase through the first half of this year, where we are moving from a downturn into recovery.

So there is a bit of a reset required, a bit of a reestablishment of capability that was taken out of business and repositioning to ensure that we take full advantage of the recoveries of the – the recovery of markets that are ahead of us. And so that’s what we have been doing.

And clearly, that’s delivered a strong order book, which gives us a lot of confidence as we go into the second half of the year. In terms of the moving parts, John?

Yes. So, I think it’s important, Stephen, to see as I said in my speech, the gross margins in Minerals are stable and what the first half has been about is really us choosing to invest to get the business ready for the order book that we see and we’ve got and delivering that through the second half.

And you think about what do we mean by the step up, as your question stated then? I would expect in the second half we get back to the top end of that 17% to 20% historic range for Minerals.

And what’s driving that? What we think about – we have guided to moderately higher revenues for Minerals across the full year in constant currency.

The first half was flat in constant currency. So what that says is there’s quite a big step up in revenues to come in the second half.

There is an operating leverage effect as well that we get coming through that’s going to drive the margins back up to that upper end of the historic range through the second half.

Next question behind you.

Mark Davies Jones at Stifel. If I can come back to the sustainability of the very strong recovery in the oil and gas business, I see your point about the long-term fundamentals are looking supportive, but in the short-term that’s obviously an industry that’s still consuming a vast amount of cash and the appetite to fund it seems to be wobbling slightly currently.

So, I guess the question is have we recovered sufficiently now that the underlying dynamics are there already to drive improvement and performance for you in terms of the pricing environment, in terms of the tightness of the market? How much pricing have we seen recover and where are we relative to where we have come from?

Yes. So, I think as we look at the market and you look at the commentary particularly from our customers, then – even if the rig count sort of slows down a little bit in the second half of the year sort of infamous Halliburton comment about tapping the brakes, that’s okay, because the market probably got a little bit ahead of itself for the reasons that you talked about in terms of the capital markets.

As far as we are concerned, the back end of 2017 looks strong regardless, because number one, the service companies are largely booked out for the balance of the year in terms of what they are going to be doing; number two, there is a backlog – a growing backlog of drilled, but uncompleted wells, which will support completion activity. So, to my mind, it’s okay if the industry just takes a pause for breath, but for us that will mean that momentum actually continues because of that lag between drilling and completion activity.

And then it does mean the big question is 2018. And as yet we don’t have visibility to that of course.

We need to see how the macro themes play out, how the oil price develops over the course of the next few weeks and then how the E&P companies think about their capital spending for next year and whether the capital markets do constrain themselves a little bit in terms of our activity. But it’s just too early to call that yet.

And as we have always done, we will call what we see, when we see it. The pricing environment, if we look at that, we have seen low to mid single-digit pricing improvements that clearly ahead of what we said earlier in the year.

But the market has tightened beyond our expectations and more rapidly than we expected to both among our customers in terms of fleet utilization, but also among the equipment suppliers as well. So, we expect that we will certainly hold on to that pricing as the year progresses.

Will we see more? Well, I think – as I said, lead times are extending, so quite a bit of that is already in our order book for Q3, the third quarter.

So, if the market does pick up again and we see more pricing, it’s only going to be in the fourth quarter. But again, we need to see how the dynamics play out before we will be able to call that at this point in time.

Good morning. It’s Glen Liddy from JPMorgan.

In the Minerals business during the downturn you focus very much on customers trying to get them to sign up to medium-term contracts and adding productivity for them. Are they still interested in that or are they reversing to their old habits of carrying inventory themselves?

And secondly, what’s the pricing environment doing in the OE side of mining? I mean, the orders are coming in, but are they still at fairly aggressive pricing environment?

Yes, okay. Thanks, Glen.

So in terms of the global agreements and the long-term contracts, I would say the momentum there has slowed down. So, it’s ebbed and flowed a little bit.

So we have got to mix some customers – a handful of customers are on global agreements, others on regional agreements. Others, it’s really driven at the mine site and we just have to be flexible.

But I would say as a trend, that’s really diminished. We are not seeing much more sort of pressure in that direction, if you like.

From an OE pricing perspective, I mean – in the minerals side it’s always a knife fight, because everybody wants the installed base, everybody – it often comes down to price from an OE perspective. And that’s why our margins are lower there than they are for spares.

But I wouldn’t say there has been any change in that environment. It’s as it has always been.

And that’s ultimately when it gets down to the final decision, there is always a – they are always trying to cut your on price. But given the spares profile, the aftermarket profile we have, that’s a price we have to pay.

I think the positive just to add to that, I think the positive that we are seeing is the aftermarket pricing environment, which you will recall has been really tough for the last 3 or 4 years and where we have not really been able to push price increases through. And I would say that’s becoming more benign.

For sure it’s looking like input costs might increase, but we think we will be at least be able to get that back through pricing as we look forward. And therefore, the rock solid gross margins that John talked about will continue to prevail.

Just a follow-up question in terms of M&A, I mean, you have recently done a small bolt-on deal. Have you got an appetite to do more and are prices at reasonable enough levels for you to execute if you find a willing seller?

M&A has always been part of our strategy and that will continue to be the case. We want to be the consolidator in our core markets.

We have always been disciplined around that. And I think the execution of the KOP acquisition demonstrates that.

I think it will be – where valuation expectations go will depend on the shape of the recovery from here. But our mindset is to participate where we can if we have the right strategic deals that meet our financial criteria.

Robert?

Good morning. It’s Robert from Morgan Stanley.

Just a few questions. First one was around Minerals.

Just wanted to check, you mentioned the kind of incremental investments over the year and the step up. Is it £5 million in the first half you said and £15 million over the year?

You are implying you are taking a bigger charge in the second half yet you are expecting that second half margin to come through. Just wanted to kind of square I guess in that 17.1% margin in the first half, what was the one-off charge and what are you expecting the one-off charge to be in second half?

Second one was just around the oil and gas business. If we get into a situation where oil heads to the low 40s, rig count actually goes down 10% or 15%, how easy is it going to be for the business to respond given you have added the extra capacity to kind of be ready I guess for the upturn you are currently seeing?

And then finally just on the legacy issues in flow, where are you in that business in terms of the kind of long-term prospects? Are you still comfortable keeping that business or are there any more things in the closet in terms of issues in the backlog or anything else we should think about?

Thanks.

Do you want to take the Minerals point, John?

Yes. So, the £15 million that we talked about in February was a group-wide spend number and obviously Minerals as the biggest division will take the largest share of that.

So £5 million of it was in Minerals in the first half. The amounts in the other businesses were relatively de minimis across the first half.

So you would expect to see a similar amount in Minerals in the second half and then the rest spread across the other businesses and the central function. So, that’s incorporated within the expectation of the margins being at the upper end of historic range.

And as I said in response to Stephen’s question, that’s really the volume coming through that’s able to absorb that through the second half.

Okay. In terms of the oil and gas question, I think if the rig count does come off by 10% or 15%, so down to 850 rigs, are still double what it was in Q2 last year.

So to my mind if we were in that scenario that implies kind of a leveling off in terms of current profitability run-rates for our business. It means growth will stop clearly.

But I don’t think it means we go backwards. And from a cost perspective, we will just need to do a slight adjustment to my mind if we are in that kind of scenario.

In terms of Flow Control, we are at the bottom of the cycle at the moment. We have had the challenges.

We are dealing with those. We are a new management team in the business.

Our focus is on really, really trying to figure out how we get the business back into growth, where are the markets that we can play in and let’s build some momentum in that business and that’s what the new management team is very much focused on doing. Jon?

It’s Jon from Goldman Sachs. And I think about a year ago you talked about a medium-term scenario in the oil and gas business, where if rig count got back to around 1,000, you could maybe get about half the pricing back you lost and you would end up in the kind of mid to high-teens margin range.

I am just wondering if you have got kind of any update on that thinking?

Well, yes, we give that a lot of thought clearly. I think we have to probably upgrade that scenario, because of the strength of the operating leverage and the early pricing that we have seen come through.

So, I think if you are in a scenario where the rig count continues to go up and we get to that 1,100, 1,200 zone, then I think we are probably above 20% in margins again for the division. It’s just – the math tells you that in terms of what we have seen in the first half.

Thank you very much.

Jonathan?

Good morning. Hi, it’s Jonathan Hurn from Deutsche Bank.

Just one question, I think when you spoke probably about a year ago you spoke about the fact that you haven’t come back on your service network within oil and gas. Going into this upturn, can you talk a little bit about the market share that you are seeing or market positions?

Do you feel that you have gained some share into this upturn?

Yes. So, well, just to be clear, we didn’t come back on the service network in minerals, but we did in oil and gas, so lot of the fixed overhead reduction.

We have seen about fixed overhead reduction of about £30 million of the £100 million or so cost we take out in our oil and gas business, £30 million of that is fixed, which hasn’t gone back. And that is service center consolidation, where in certain districts we have had 2 or 3 service centers through the acquisitions that we have made and we have consolidated those down into one service center.

And that’s perfectly satisfactory for serving the market as we move forward. We just don’t need to put those costs back in.

So that’s permanent. Yes, look, I told you in my speech I think around the edges we have taken market share and the consolidation that we have seen among our customers was we maybe a little bit worried about that 12, 18 months ago in terms of how that would shape out, the dynamic.

As I said, I think that’s been a positive for us. It’s created larger, more sophisticated customers, more focused on technology, more focused on rationalizing supply chain efficiency.

And that just plays to our strengths because of the way that we operate and our ability to serve those customers. So, certainly from my perspective I think we have seen market share growth.

But we have also retained our good distribution across the customer base within the offered service company. So I am very happy with where we are in terms of our market position.

Alex?

Hi. It’s Alex Virgo, Merrill Lynch.

So, can you just go into a little bit of detail around your comment on Q3 development of the oil and gas business? I think you talked about the abatement of growth in refurbishment work moving towards underlying consumables demand.

I am just wondering if you could develop that a bit further for us? And then on Flow Control, could you just talk a little bit about what the problems were around Gabbioneta and why you think you fixed them?

Okay. So in the third quarter, I mean, if you think about what’s been going on, you have had this sort of quite a significant wave of refurbishment activity going through the businesses, the rig count has grown, we have seen that often service companies pull back the cannibalized fleet and get that ready to go back into service.

And we have had the benefit of that as all that’s been going through workshops and the demand for spare parts. But we are probably getting to the end of that probably I say, because there is still 3 or 4 million of horsepower that is cold stacked and there is a question as to whether that comes back or not.

It’s the older stuff. It’s the older technology.

So I think it’s going to be a decision for our customers to make in that. But as the 13 or 14 million that is now operational, which I as said is 90% percent utilized, has gone back to work.

So, we are just seeing the aftermarket demand kick up. And that’s – as that wave of refurbishment sort of slows down a little bit, so the aftermarket picks up to take on the growth that we are seeing in the market.

So, it kind of smoothens out essentially over the third quarter as that effect takes hold. As far as Flow Control is concerned, John said we had a big backlog of orders, which – some of which go back to 2013 and ‘14.

And with new management team in Gabbioneta, we identified issues in terms of the cost to deliver those contracts as we get to the tail of that order book. And so we have done a full review to identify all of the elements of that and taken a prudent view in terms of the potential liquidated damages and cost to complete on delivering those contracts.

So, that’s now tidied up. That’s done and clearly recognized in the first half of the year.

We have got the tail of that order book to deliver over the back end of the year, but obviously that should then be neutral from a P&L impact. And the new management team is then focused on, okay, how do we get this business really competitive and growing again.

And so that’s going to be the focus as we move on from here. So in terms of dealing with that – dealing with the historic issues, that’s done and the focus is now on how we take the business forward.

Okay. Well, if there are no further questions, can I say thank you very much for coming along today.

I know that Bloomberg was saying this is the busiest reporting day ever. So it’s probably reflected in the fact the audience is quite thin.

But for those that made it, thank you very much for that. And obviously if there are any follow-up questions, then John and I will be around for a few minutes to deal with those.

But thanks again for coming today.